Argentina: The Myth of a Century of Decline

A century of decline” with the subtitle, “One hundred years ago Argentina was the future. What went wrong?” As usual in that magazine, it is a nicely written article. But it is not, in my view, an accurate interpretation of Argentina’s history. I had the opportunity to debate at length Alan Beattie’s erroneous comparison between Argentina and the USA in these pages (starting with this blog http://www.economonitor.com/blog/2009/08/usa-argentina-and-alan-beattie-wrong-starting-point/). The Economist’s article is much more nuanced but maintains a common view that Argentina’s history is a long decline since it was a very important country at the beginning of the 1900s to the less promising current times. The narrative by The Economist ends with a very useful suggestion: “No other country came so close to joining the rich world, only to slip back. Understanding why is the first step to a better future.”

The “hundred-year decline” is an enduring myth in Argentina as well, particularly in the case of that minority that seem to cherish the times in which Argentina was an agrarian country with a very restricted democracy or not democracy at all. Therefore, it is indeed crucial for Argentina’s future prospects to have a correct diagnostic of the economic evolution of the country during the last century and, then, to try to identify the reasons.

Below I will try to show that instead of a “century decline,” what characterizes Argentina’s economic evolution as compared to other countries is that it suffered a deep economic collapse from the mid 1970s to the end of the 1980s (in what follows, data is from the Maddison Project. http://www.ggdc.net/maddison/maddison-project/data.htm).

This structural break in the evolution of the GDP per capita (GDPpc) in Argentina can indeed be attributed to internal conditions in that country. But other than that, there is not much difference in the evolution of Argentina, when compared to, for instance, Australia, or Uruguay, two countries mentioned by The Economist as either not having suffered the “hundred year decline” and/or to have followed better economic and institutional policies than Argentina. It is true that other countries such as Korea or Spain, which had far lower GDPpc than Argentina during great part of the 20th Century overtook Argentina by a large margin since the 1970s. But it is also true that if Argentina had avoided the sharp drop in the 1970s and maintained the share of the US GDPpc that prevailed before that structural break, the country would have had now an income per capita above all countries in LAC and many European countries such as Portugal, the Czech Republic, Hungary, and Poland. And if it had maintained the lineal trend growth from the 1960s to the mid 1970s it would be now at about the level of New Zealand or Spain, according to the data of the Maddison Project. In other words, if Argentina had avoided the real tragedy that started in the mid 1970s, the country would be now a developed country.

Therefore, what has to be explained is not “a hundred years of decline” but the collapse in the mid 1970s. In what follows I will present the data that shows the 1970s structural break and make some comments about the issues surrounding such break, but the discussion about what I consider the deeper reasons for that collapse exceeds this note.

There, it can be more clearly seen the decline since the mid-1970s until the low of 1989-1990.

If, as argued before, Argentina had maintained the lineal trend growth from the early 1960s to the collapse in mid-1970s, the country would have had a GDP pc about 60% larger than in 2010, placing Argentina among the (lower range of the) group of developed countries.

Of course, what counts is not only the absolute level of GDPpc but the relative one, i.e. how much has grown Argentina compared to other countries. Next Chart shows the ratio of the GDPpc in PPP terms for Australia, 12 main European countries (Austria, Belgium, Denmark, Finland, France, Germany, (Centre-North) Italy, Holland/Netherlands, Norway, Sweden, Switzerland, UK) and Argentina, compared to the US. Data goes from 1900 to 2010. There are five different phases in the evolution of Argentina’s GDPpc compared to the US and the other countries and regions. In the first phase, from 1900 to the end of the 1930s, Argentina oscillates between 60-80% of the USA’s GDP pc, comparable to the European group (average 67% for Argentina and 69% for the European countries), but clearly below Australia, which moves between 80% and even more than 100% of US GDPpc during the years in which Australia’s incomes were larger than that of the USA (the average for the period was 91%).

In Phase II, from the end of the 1930s to the mid 1940s all three countries and group of countries dropped as percentage of USA’s GDPpc, because this last country doubled the size of the economy between 1938 and 1944 as a result of the economic expansion linked to industrial production for WWII (an average annual growth of more than 12%). In the case of the European countries the decline in the ration was also due to the negative impact of WWII. Although the US gave back some of the economic gains of the war-time expansion during the recession of the immediate postwar period, it remained at a more elevated level; and that expanded economy explains the relative decline of Australia and Argentina, and not something that either country did.

In Phase III, from 1945 to 1975 (period that in Argentina starts with the first government of President Perón and ends with the military coup that ended the third government of the Peronist Party) Australia and Argentina stayed on the new and lower plateau resulting from the sharp increase in the US economy: Australia moved down from 91% of USA’s GDPpc on average in Phase I to 77% in Phase III and Argentina from 67% to 49%. Australia has broadly maintained that level until now (with small variations), while Argentina stayed on the new plateau only until the mid 1970s, when the deep drop that is at the core of the “hundred-year-decline” myth took place.

The European countries, on the other hand, helped by the historical war reconstruction efforts (linked to the US-financed Marshall Plan) reached 74% of the US GDP pc, similar to the levels of the pre-WWI era (and way above the previous average for the 1900-1938 period). However, Australia and Argentina, which did not have similar support as Europe, stayed, as noted, at the new and lower plateau. Therefore, comparisons of the relative decline of Argentina (and Australia) against the western European countries is not a tragedy of the former two countries but a triumph of the postwar strategy of reconstructing the capitalist and democratic side of that continent.

So far it has been shown that between 1900 and 1975, that is ¾ of the time into the “hundred years of decline,” both Australia and Argentina have moved broadly in parallel. Of course, Australia, which has about half the population of Argentina and is endowed with more natural resources than the latter country, was always above in GDP pc even though the relative movement mirrored each other. If Argentina was declining, then Australia was declining as well. But, in any case, it was due to a single and unprecedented jump in the US economy and not because both countries had changed their previous growth trajectories.

Next Table presents another view of the same evolution: it shows the GDPpc of Argentina and Australia as percentages of the USA and then the percent points (pps) lost by both countries during the periods shown compared to the period between 1900 and 1938. The bottom for Argentina in 1989-1990 is also included in the Table.

It is clear that both countries lost several percentage points after the USA’s GDPpc doubled in the early 1940s: for instance, in the period 1945-1975, Australia’s share with respect to the USA’s GDPpc was almost 16 pps lower when compared to the pre-WWII period. Argentina’s share lost somewhat more than 18 pps. Although it is clear that between WWII and the mid-1970s Argentina did somewhat worse than Australia in comparison to the US (a difference of about 2 pps in lost share), that is hardly the stuff of a “declinist tragedy” and it can be explained by Australia’s better economic performance during the early war period: that country, better positioned in the international economy after aligning itself clearly with the winners of WWII, grew at almost twice the rate of Argentina between 1938 and 1944. However, from 1945 to 1975 both countries grew at about the same rate (an annual GDPpc growth of 1.9%).

The problem for Argentina happens in Phase IV, since the mid 1970s to the bottom of 1989-1990, when the country lost an additional share of about 20 pps (dropping to 28% of USA’s GDPpc in 1989-1990). On the other hand, Australia basically maintained its share at around 76% of US GDPpc in 1945-1975 and in 1975-1989. Therefore, it was during this period when the structural change that placed Argentina on a far lower level took place. This is the “declinist tragedy” that needs to be understood, which is very different from the “hundred year decline” myth.

The decline started with the fracture of the society after the death of Perón in 1974, but it was the subsequent military coup of March 1976, which aiming at stamping out the Peronist Party and its followers (a “final solution” for Argentina, if you will), killed and forced into exile a significant number of Argentines (which among other things hollowed the previously relatively well-built basis of scientists mainly in public universities), started to dismantle the manufacturing base that was supposed to give the Peronist Party its loyal labor base, generated the debt explosion that led to the 1980s debt crisis, and spent a large amount of fiscal resources into different military adventures (including the misguided invasion of the Malvinas, which generated further loses of lives as well).

The Radical Party, with President Alfonsín, won the elections in 1983 and did a very good job at restoring the democratic institutions (including the unprecedented trials and imprisonment of the military leaders responsible for the tragedy of the 1970s. But the Administration was hobbled by the very weakened and highly indebted economy left by the previous dictatorial government, had to contend with a restive military (which attempted several coup d’etats in the 1980s and 1990s, until the putschists were finally defeated during the Menem Administration), was under the pressure of a labor force that was expecting improvements in its living conditions after a decade of wage compression under the military, and suffered the collapse of commodity prices in mid-1980s. Phase IV ended with the 1989 hyperinflation crisis that forced President Alfonsín to leave his Presidency several months earlier.

During Phase V, which starts in 1990, Argentina’s economy began to grow again, although not without disappointments, such as the crisis generated by the fixed exchange rate 1peso-1dollar, and the current period of stagnation, starting mostly in 2012 (not shown in the Charts), but which has also been affected by the manipulation of inflation statistics since early 2007. The ample electoral victory of President Cristina Fernandez de Kirchner in 2011 created the not unusual situation of a government that lets a crucial political triumph go to their collective head, and, as a consequence, not only did not face the problems that needed attention (starting with the inflationary problems and the energy subsidies) but made further policy mistakes, particularly during the last two years.

Still, during the 1990-2010 period the GDPpc of Argentina grew at an average of 2.2%, even with the collapse after the end of the Convertibility Plan. This recent period has shown the best growth performance since the “golden era” between 1880-1900 (3.2%), and it has been clearly above the 1990-2010 performance of the US (1.3%), the 12 European countries (1.3%), Australia (1.9%), Brazil (1.3%), and México (1.3%), although it has been worse than Chile (3.8%) and Uruguay(2.8%), just to give some points of comparison. In consequence, as Table 1 shows, Argentina, by 2010, had recovered almost 6 pps in this period compared to the US GDPpc, due to a combination of faster growth and the current economic slowdown in the US.

The next Chart show Argentina compared to Australia, as before, but adding Uruguay.

The relatively parallel decline of Argentina and Uruguay (a country that The Economist considers, not without reason, as having followed better economic and institutional policies than Argentina) should open serious question marks to some of the explanations offered in the article about the reasons of the relative decline of Argentina.

I could add other similar charts with different countries, but the story of the 1970s collapse does not change.

In summary: the problem of Argentina is not to reverse hundred years of decline but to finally heal the political, social and economic wounds of the military coup of the mid 1970s. Some would say that a long time has passed to use that event as a benchmark. However, it took about a century between the US Civil War and the 1960s when some of the most egregious elements of discrimination against minorities were addressed. Healing historical wounds may take decades and even centuries.

In any case, Democratic governments since 1983 first put a floor to that decline and then, with ups and downs, with successes but also mistakes, they have placed the country on an upward trajectory again. A new democratic government will take power in December 2015 and the healing process will hopefully be largely completed. I firmly believe that, in one decade or so, Argentina can be a developed country, given its human and natural resources. A first step would be to follow policies that would allow to go back to the share of the US GDPpc that prevailed from 1945 to 1975.

But to do that, it would be wise to discard the hundred-year-decline myth with its longing for an Argentine golden era that never was.

Outside Argentina, that misperception serves to structure nice morality tales, such as the one presented by The Economist, in which a country of great potential is led astray by the fact that its own citizens consistently elect “populist” governments. This view leads to the unhelpfully irrelevant suggestion offered by The Economist that Argentine people should change and learn to endure pain (“Argentines themselves must also change… Persuading the population to embrace the concept of necessary pain will be difficult.”).

More than irrelevant, it is also a dangerous idea: although certainly is not what The Economist had in mind, the notion that Argentina’s problem has been that large part of its citizens that consistently elected “populist” governments was a core tenet of the “final solution” that the 1976 military coup tried to implement.

Now that in our own noisy and boisterous ways (and also making more mistakes than most of us would wish), we Argentines are trying to heal that wound, it would be useful if our citizens and well-intentioned outsiders (and I firmly believe that The Economist is part of this latter group) ditch once and for all the myth of the “hundred year decline.” Then Argentines should devote ourselves to completing the work of becoming a developed country, task that suffered a tragic blow a fateful day in March 1976.